The notice shown below appeared in the Financial News on 1 October 2017. ARGAN N
ID: 2464178 • Letter: T
Question
The notice shown below appeared in the Financial News on 1 October 2017.
ARGAN NL
Notice of Sale of Forfeited Shares
All shares on which the call of fifty cents per share, due for payment on 1 September 2017, remains unpaid, will be sold by public auction on 1 November 2017, at 11 a.m. at the Australian Securities Exchange, Sydney, NSW.
Assume the following:
• 1 000 000 shares were forfeited
• the forfeited shares were all paid to $1.50 per share
• all the shares were sold at the auction for $1.80 per share and will be credited to $2.00
• costs of forfeiture and reissue amounted to $4000
• the balance of the Forfeited Shares account will be refunded to the former shareholders.
Required
Discuss the benefits to a company from forfeiting and reissuing shares, and prepare journal entries to record the forfeiture and reissue above.
Explanation / Answer
The main benefit to a company for forfeiting and reissuing shares is to tidy up the share capital account and the share register. Shares are usually forfeited for non-payment of calls; hence, by forfeiting and reissuing these shares, the company can ensure that all shareholders are paid up to the same amount on their shares. This makes it easier in the future when dividends are declared on a per share basis in that all shareholders are paid up to the same amount and no proportionate dividends need to be calculated.
ARGAN NL
General Journal
2017
Share Capital Dr 2 000 000
Call Cr 500 000
Forfeited Shares Liability Cr 1 500 000
(Forfeiture of 1 000 000 shares
called to $2 for non-payment of 50c call)
1 Nov Cash Dr 1 800 000
Forfeited Shares Liability Dr 200 000
Share Capital Cr 2 000 000
(Reissue of forfeited shares at
public auction for $1.80, paid to $2)
Forfeited Shares Liability Dr 4 000
Cash Cr 4 000
(Expenses of forfeiture and reissue)
Forfeited Shares Liability Dr 1 296 000
Cash Cr 1 296 000
(Refund to former shareholders)
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